"I'm an American living in London and I am shortly going to launch my own part-time coaching business here, probably in April after I receive indefinite leave to remain. I'm looking for help understanding the tax implications in the US as well as the UK if I set up as an LLC or as a sole trader, and once that decision is made, ongoing support with filing tax returns in both places. Is this something you can help me with?"
As a sole trader, you will pay UK taxes on net income from your business. Additionally, you must charge your customers and subsequently pay Value Added Tax (VAT) to the HMRC. If you set up as a sole trader, you are personally liable for all business debts you may incur. Additionally, US expats must pay self-employment tax. This includes a 12.4% Social Security tax on income up to $124,000, and another 2.9% Medicare tax on all income.
If you choose to set up your business as an LLC, you will pay taxes in the same way you do for a sole trader. Income will simply flow through the business and be treated as normal income for UK taxes purposes, avoiding any corporate tax (be sure to file Form 8832 to take advantage of this). However, you will not be personally liable for any business debts. Once again, you will have to charge and pay VAT.
No matter how you set up your business, you must fill out both a UK and US tax return for their respective taxable years (UK is April 6- April 5, US is Jan 1- Dec 31). However, you can take a tax credit on your US return for the amount of tax you pay to the UK. So even though you report the income in both countries, you are only really paying UK tax.
Finally, you may be able to take advantage of the Foreign Earned Income Exclusion once you live outside the US for a full year. This allows you to exclude $99,200 from your taxable income on your US tax return each year (NOTE: you must calculate Self-Employment tax on income before taking this exclusion). This deduction combined with the Foreign Tax Credit mentioned above will greatly reduce the amount of US tax you will have to pay.